Philippines Leads Asian Rise at China-Japan Cost

The Philippine national flag is raised during a ceremony to launch a bulk carrier at the Tsuneishi Holdings Inc. shipyard in Cebu, the Philippines. Photographer: Veejay Villafranca/Bloomberg

July 23 (Bloomberg) -- Jose Winylito Tanquis has reason to
be proud as he raises a flag to signal the launch of the 58,000-ton “Ocean Symphony” in the Philippines. Not only did he help
build the cargo vessel, his son John now works at the yard.

“Now, he can buy his own stuff, like shoes and clothes,”
said Tanquis, 47, a foreman at Tsuneishi Holdings Inc.’s yard in
Balamban on Cebu Island. At 21, John is the eldest of six
siblings who will enter the workforce in the next decade.

The so-called demographic dividend from a rising supply of
young workers is one reason Japan’s second-largest shipbuilder
expanded in the Philippines, where workers are on average half
the age of its Japanese employees. Tsuneishi is considering
Indonesia, the Philippines and Myanmar for another shipyard,
said Hitoshi Kono, chief of the company’s local operation.

Asia’s manufacturing powerhouses -- Japan, South Korea and
China -- are among the fastest-aging countries in the world,
while developing nations in Southeast Asia are among the
youngest in the region. As factories, jobs and investment flow
south to tap cheaper labor, growth in the 10-member Association
of Southeast Asian Nations is poised to accelerate, propelling
the area’s currencies and fueling consumer and property booms,
Bank of America Corp. says.

“The demographic dividend is over for Japan and Korea, and
it will be over for China soon,” said Yoshimasa Maruyama, chief
economist at Itochu Corp., Japan’s third-largest trading company.
“It’s happening now in the Asean area, and it will continue for
some time.”

Parrotfish Fillet

For Cebu, famous for its luxury beach resorts, that means
regional authorities are building another four 10,000 square-meter (108,000 square-foot) factories this year. Krispy Kreme
Doughnuts Inc. unveiled its first outlets on the island in
October, while 7-Eleven Inc. chose July 11 to open its first two
Cebu convenience stores.

Two hours’ drive from the Shangri-La Mactan Resort & Spa --
where tourists enjoy parrotfish fillet and black-pepper squid
overlooking the ocean -- Tsuneishi has launched 11 ships this
year, supporting more than 15,000 workers. The company has two
shipyards in Japan and one in China.

Mitsumi Electric Co., with more than 14,000 staff on Cebu,
is among businesses looking to move more manufacturing out of
China, said Yoshitsugu Murakami, a spokesman in Tokyo for the
electronic-parts maker.

“Labor costs in China have been rising,” Murakami said.
“It’s good for us to shift production to the Philippines little
by little. It’s easy to recruit talented workers.”

‘Standout’ Winner

The Philippines is a “standout” among countries set to
benefit from a bigger labor pool, with its rate of economic
expansion likely to rise as much as 1.5 percentage points during
the next decade, according to Chua Hak Bin, an economist in
Singapore at Bank of America’s Merrill Lynch division.

The International Monetary Fund predicts China’s growth
will slow to 8.5 percent by 2017 from 9.2 percent last year,
while the Philippines will expand 5 percent compared with 3.7
percent, and growth in Vietnam will reach 7.5 percent from 5.9
percent, according to projections published in April.

“Domestic demand will more likely grow at faster rates if
the labor force is going to grow more quickly, and that will
spur the exchange rates as well,” said Chua, who previously led
the Singapore central bank’s external economies division.

Standard & Poor’s this month raised the Philippines’s
credit rating to one level below investment grade, its highest
since 2003. In January, Moody’s Investors Service elevated
Indonesia to investment grade for the first time since 1997.

Education Support

The demographic dividend -- a term popularized by
economists David E. Bloom, David Canning and Jaypee Sevilla in a
2001 National Bureau of Economic Research study -- happens when
most of a country’s population is in the 15-to-64 working-age
range. This increases productivity if supported by policies that
promote health, family, labor and financial and human capital,
the study concluded.

The Philippine labor force will expand by almost 18 million,
or 31 percent, to 75 million by 2020 compared with 2010, Merrill
Lynch projected in an April 27 note. Malaysia will grow by 19
percent, to 22 million. Indonesia will see a gain of more than
18 million, to 180 million.

China’s workforce will peak at around 970 million in 2020
as the population’s median age rises by more than three years,
to 37.8, Merrill Lynch forecasts. Japan’s median age will
increase to 48.5 and South Korea’s to 43.4, compared with 23.9
in the Philippines and 28.4 in Malaysia.

Skills Handicap

India has the biggest potential dividend of all, with a
projected labor-force expansion of 95 million by 2020, Merrill
Lynch estimates. Even so, businesses from Larsen & Toubro Ltd.,
the nation’s biggest engineering company, to Leighton Holdings
Ltd., Australia’s largest builder, say a lack of skills means
there aren’t enough trained workers to build the roads, railways
and ports India needs.

The South Asian country’s expansion skidded to a nine-year
low in the first quarter, and the rupee tumbled to a record low
against the dollar in June, as investors lost confidence in
Prime Minister Manmohan Singh’s ability to revive the economy.

“An increasing labor force is definitely a plus point,”
Sri Mulyani Indrawati, a World Bank managing director and former
Indonesian finance minister, said in a May 24 interview in Tokyo.
“But it’s not necessarily going to become an economic gain if
they’re not trained and skilled.”

Adult literacy is above 92 percent in the Philippines,
Malaysia and Indonesia, while in India it is 63 percent,
according to the United Nations 2011 Human Development report.

Investment Impediments

Other impediments to realizing the potential from
demographic shifts include lawlessness and delays in
implementing governments’ ambitions for infrastructure.

The Philippines ranked 130th of 142 countries in the World
Economic Forum’s latest survey on the cost to business of
terrorism, and 112th in terms of crime and violence -- the worst
in Southeast Asia. Fifty-four percent of mining companies said
issues such as attacks by terrorists, criminals and guerrilla
groups are a strong deterrent for investors, a Fraser Institute
poll released in February showed.

The nation also has lagged behind on government
construction projects, with its fiscal deficit last year below
projections mainly because public capital spending had fallen,
the IMF said in March.

Rich Neighbors

One advantage for Southeast Asia, astride one of the
busiest maritime arteries, is proximity to Japan and China, the
world’s largest net creditor nations.

“Investments in Asean will continue for the next decade,”
said Jan Oosterveld, former head of Royal Philips Electronics
NV’s Asia Pacific operations and now a senior lecturer at the
University of Navarra’s IESE Business School in Barcelona.
“Simple manufacturing will go to the cheapest countries: It’s
going now from China to Vietnam, Laos, Cambodia, Myanmar and
Bangladesh. More advanced industries will go to Singapore,
Malaysia, the Philippines.”

Japan’s foreign direct investment to Asean more than
doubled in 2011 to $19.6 billion from the year before,
surpassing the $14.2 billion to China and Hong Kong, according
to the Japan External Trade Organization.

“Asean labor costs are becoming relatively cheaper because
China’s wages are rising,” said Satoshi Osanai, a Daiwa
Institute of Research economist in Tokyo. Migrant workers’
average pay rose 21 percent in China to 2,049 yuan ($322) a
month in 2011, according to the country’s National Bureau of
Statistics.

Wage Gap

The Philippines lured $6 billion last year in pledged
foreign investment, led by Japan, where the average wage for a
nonagricultural worker is more than 26 times higher, government
and International Labor Organization data show.

Credit Suisse Group AG in March boosted its estimated
trend-growth rate for the Southeast Asian country to about 5
percent, from 4.5 percent to 4.75 percent previously, citing
President Benigno Aquino’s $16 billion infrastructure program
and improved transparency. Aquino, 52, said in a May interview
his nation’s dream to lure manufacturing “is happening now.”

“What was once the sick man of Asia now brims with
vitality,” Aquino said in his state-of-the-nation speech in
Manila today. “Until recently, we had to beg for investments;
now, investors flock to us.”

Electronics accounted for about half the Philippines’s $48
billion exports last year and more than 10 percent of the
economy. Investment in the nation’s economic zones, which
primarily comes from abroad, almost doubled to 16 billion pesos
($384 million), according to the Trade Department.

Young Spenders

Rising economic growth enriches young spenders, a boon to
companies such as Nestle SA, the world’s biggest food maker, and
Unilever NV, provider of products from Dove soap to Knorr soup,
according to Amlan Roy, head of global demographics and pensions
research at Credit Suisse in London. He also favors Procter &
Gamble Co., the world’s largest consumer-products company, and
insurers including Samsung Life Insurance Co.

In the Antipodean Cafe in Kuala Lumpur’s ritzy Bangsar
neighborhood, diners in their 20s relax on a Sunday morning over
all-day breakfasts and 9 ringgit ($2.80) lattes. New Zealand
owner Alun Evans, 43, says he opened his first outlet in Jakarta
five years ago to serve expats. Now the six branches he has in
the Indonesian and Malaysian capitals serve mostly locals, and
he’s looking at adding venues in Singapore and Manila.

Investment has transformed the village of Balamban, which
got its first shopping mall last year, quadrupling its
population since the 1980s to about 80,000.

First Jobs

“There were practically no jobs before, none; nothing was
happening until Tsuneishi came,” said Renold Macasi, 34, a
general foreman at the shipyard. Tanquis, whose next two eldest
children are in college, said he hopes all his sons and
daughters will get their first jobs there.

The Balamban works built its first vessel in 1997, and the
company forecasts the yard will have 35 billion pesos in sales
in 2012, more than double five years ago.

In many ways, the town mirrors the port in Japan after
which the company is named, where its original yard began
building wooden boats in 1917.

“Tsuneishi was a very small town just like Balamban,”
said Kono, 52, who was born in a house overlooking the docks.
“Balamban now, too, is a shipyard town; everybody gets their
happiness from the ships.”